Forthcoming JPMorgan Results to Confirm or Deny Bank Rally?

On Thursday the viability of the recent bank rally was called into question after bulls encountered strong headwinds in the form of weaker than expected U.S. economic data and mixed comments from theEuropean Central Bank chief.

Specifically, ECB President Mario Draghi said the euro zone economy continued to face great uncertainty but saw some signs of stabilization. Also U.S. retail sales rose at the weakest pace in seven months in December and first-time jobless claims increased.

If the latest developments call the recovery into question – the rally in the banks will be among the first catalysts to land under a microscope.

How should you trade bank stocks considering the sector climbed more than 6% in less than two weeks.

If you’re kicking yourself for missing the recent bank rally, Trader Stephen Weiss suggests taking a wait and see approach – at least for another day until JPMorgan issues earnings on Friday.

"The issue is that the investment banking side of their banking business is getting crushed. Volumes are down and there's no revenue from IPO's."

However, If JPM suggests business is getting incrementally better, Weiss says to consider dabbling in high quality names. “I’d own JPMorgan and Goldman –– but only small positions.” He still thinks the overall market faces challenges and if marco headwinds drag down the S&P, these two stocks will go with it.

Trader Brian Kelly doesn't share the optimism. He's negative on JPM and most big banks because he thinks the investment banking business will remain challenged for quite some time to come.

He expects JPMorgan CEO Jamie Dimon to confirm his thesis.

However he 'does' like regionals; largely because they aren't involved in investment banking and he's optimistic abou the US economy.(Although retail sales data mentioned above was weak the recent jobs report was strong and so was ISM.

If you share Kelly’s thesis and expect the US recovery to chug along, he suggests playing regional banks with a long position in the KRE.

Trader Steve Grasso is skeptical. He thinks the bank rally may already be over-extended and that JPMorgan results will confirm his outlook.

“The market can overshoot to the upside,” he reminds. With all those new regulations coming, Grasso says “At these levels, I’d rather be a seller.”

If you’re looking for a ‘tell’ Pete Najarian suggests watching action in the XLF. He’s spotted a lot of Feb 14 call buying – that’s important because 14 is about the 200-day moving average in the XLF- and the 200-day has generated strong resistance since May.

If the XLF can break above that level, Najarian would take the move as a bull signal.

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Trader disclosure: On Jan. 12, 2012, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders: Najarian is long AAPL; Najarian is long BAC; Najarian is long C; Najarian is long MSFT; Najarian is long INTC; Najarian is long YHOO; Najarian is long MOS; Najarian is long JAG; Cortes is long SO; Cortes is long KFT; Cortes is short Crude; Cortes is short MCD; Cortes is short QQQ; Cortes is short FSLR; Cortes is short XRT vs. S&P long; Weiss owns BRCM; Weiss owns EUO; Weiss is short AAPL puts; Weiss owns MOS; Weiss owns POT; Grasso owns ASTM; Grasso owns AVAV; Grasso owns BA; Grasso owns D; Grasso owns LIT; Grasso owns MHY; Grasso owns PFE; Grasso owns PRST; Grasso owns S; Grasso owns WFT; Grasso owns XLU

Brian KellyShelter Harbor Capital is long IWMShelter Harbor Capital is long KREShelter Harbor Capital is long XHBShelter Harbor Capital is long EWZShelter Harbor Capital is long GLDShelter Harbor Capital is long SLVShelter Harbor Capital is short Aussie dollarShelter Harbor Capital is CDRShelter Harbor Capital is UBS